Is it Time to Give Up on Homeownership?

“They’ve seen what their parents are dealing with, what their brothers and sisters are dealing with, in terms of being saddled with home values that are less than what was paid for,” says Paul Conway, a former chief of staff for the U.S. Department of Labor who is now president of Generation Opportunity, a think tank specializing in the economics of Generation Y.

Sociologist Katherine Newman, who chronicles some of the struggles in her book The Accordion Family: Boomerang Kids, Anxious Parents, and the Private Toll of Global Competition, agrees with Conway that we may be witnessing the creation of a generation of renters.

“I’m hoping that the Millennial Generation doesn’t set its sights on homeownership as a benchmark of economic stability, because it’s going to be out of reach for so many of them that it will just be a recipe for frustration,” she says.

Homeownership among millennials has been on a gradual but steady decline, according to the latest available U.S. Census Bureau data.

Even with big drops in housing prices and interest rates, getting a mortgage has become a lot harder since the heady days of “no income, no assets” loans that fueled the housing boom of the early 2000s. Most lenders now require a rock-steady source of income and a substantial down payment before they will even look at potential borrowers. And many millennials won’t be able to reach that steep threshold.

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1.
JKB

If homeownership is becoming passe’, it might just be because property taxes are where the local governments are going for their cash machine. Why buy into being a payer when you can be a consumer?

Home prices in large swaths of the major cities are STILL extremely high, and perhaps have simply not yet felt the collapse of the bubble.

Insane government regulations have raised the price of home ownership in most jurisdictions, I gather. OTOH, having just been involved in the renovation of an older home, it may be newer construction is improved in many ways, yet the improvements cost money which seemed minor when the values were sky high, and does not seem at all minor as the values continue to collapse.

Most people shouldn’t be homeowners to start with and without government intervention in the market they wouldn’t.

If local banks were on the hook for loan underwriting the rate that home prices increase would go back to the historic norm when adjusted for inflation that was mostly flat for the period of 1800 to 1980.

The norm for humans is renting. If you go back to the times before the New Deal and the home mortgage interest deduction from income taxes most people did not own houses. And by most people I would also include many who could, even without the tax subsidy of the home mortgage interest deduction, afford to buy one. Doctors, business owners, people of inherited money, etc., rented along with their less wealthy neighbors, and during that era there was no shame or loss of whatever “status” a person had because they rented. Most folks knew that renting was OK, just another option, and that owning lots of property and managing it for other people to live in and rent was an industry if not a profession.

There was an almost unconscious understanding that not everyone – in fact, most people – were not suited for home ownership. Given less involvement in the housing market by government, many people who “own” (mostly the bank, truth be told) now would not be able to afford to do so. Add to this the not insubstantial number of folks who actually possess the money but do not have the discipline to budget it, or the knowledge or wherewithal to maintain a property once purchased, or those who will simply walk away if their own situation changes for the worse, and you end up here. Three generations ago people understood that this was the case. Why not now?

Certainly folks as late as the 1920′s would never have gone in for a house they could not afford just because the banking industry came up with a loan program called “subprime”. They inherently knew that home ownership was not a right and knew that they shouldn’t buy something they really couldn’t afford. It is only the last 80 years of New Deal/Great Society entitlement propaganda that have engendered people to believe that home ownership is a right and that it is the responsibility of government through programs like CRA (which force banks to provide the credit) and home mortgage interest deduction (which redistributes tax burdens to subsidize home ownership for the less wealthy) to make sure everyone gets to own a house.

Eliminate the home mortgage deduction immediately for second properties. Phase it out over ten years for the first ones. Prices will come down to reflect the lack of subsidy, making housing actually more affordable to those who are truly interested in, and financially deserving of, owning. And the unsubsidized market will reflect the true value of housing as shelter, not as an investment. And for God’s sake stop running radio/internet ads promoting universal home ownership with my tax money.

Unless you can buy a house with cash, you will basically be renting from the bank for the rest of your life. Then for those who miraculously pay off their mortgage, there is always the risk that your property taxes will be raised to an unaffordable level to pay for your public employee neighbor’s pension and you will be left homeless eating catfood. Who the hell came up with the idea of taxing shelter? What a jerk.

You always pay property taxes, the only difference is that if you rent, you don’t notice you are paying.
You pay for taxes on commercial property, too.
It’s not taxes but the danger of tax increases that should be a reason not to buy:
if you buy and then the government raises taxes, you have to sell at a lower price if you want to move to another city/state/country.

This is only one of the factors to be weighted in the balance, though.

Possibly. Think about it… who’s explained to the general public why the housing market collapsed? Who’s explained why Mom, Pop, Brother and Sister had houses that lost value? Why it’s the same people who caused the problem in the first place – politicians. And who did the politicians blame? Jews. Yeah, yeah, they said “greedy bankers”, “Wall Street”, “unscrupulous lenders” but that’s just code for “Jews”. People who bought houses they could not afford lost money “through no fault of their own”. It was the Jews I tell ya!

The cynic in me suggests, however, that the housing collapse may have been intentional. Politicians love renters because, as many above posts suggest, renters don’t think they pay property taxes. If you rent then the property tax is a hidden tax and, if you recall, it was the home owners in California that pushed limits on property tax increases. The same tax increases that were putting people out of their homes were also raising rents but there was a big difference. If you were buying then you knew the politicians were taking more money, if you rented then it was “greedy landlords”.

Now the politicians could explain that the problem arose from a small percentage involved in “get rich quick” schemes and that most home buyers made good decisions. The politicians could explain that it was the fault of the few trying to game the system that brought the system down but that would generate questions about how the few were able to game the system in the first place. And those questions would point at the politicians so it’s much better to blame “the market” and have the voters trust in “Nanny Sam” than to understand that Government collapsed the economy, the housing market, and destroyed job opportunities for the Millennials.

A week ago today, I paid off my mortgage, after 32 years in my current home. Over that period, I paid more in interest charges, and much more in property taxes, than the purchase price of my house. It’s led me to wonder how wise a decision the purchase of a conventional single-family home really is, and whether it’s something I would recommend to a young man embarking upon a career and the formation of a family.

Part of the phenomenon, of course, concerns the essential disappearance of the multi-generational family dwelling. With two (or more) generations of earners to share the costs of a home and the labor of maintenance, home ownership changes quite a bit. (Remember also the great contributions grandparents can make to a household with minor children in it.) But since World War II, zoning regulations, building codes, and tax policy have all militated against such arrangements. Today’s homeowning couple usually has to “go it alone,” with consequences that are sometimes disastrous and always expensive.

Sadly, this is a typical consequence of government intervention in the economy. Part of the federal “redirection” effort after WWII was the creation of massive incentives for the purchase of single-family homes. But every cause has more than one effect (“You can never do only one thing” — Marc Steigler), and the explosion of all the other interventions and exactions that have made home ownership so expensive and burdensome followed naturally. Whether we’ll ever return to a semblance of reason in this regard is impossible to say.

The problem of home ownership (or home moanership, as it oft has been described to me) goes far beyond the problem of equity and initial finances. Just consider: Baby Boomers largely drove the housing market (and in some areas, fed the tendency to build or buy gigantic houses with acre-sized lots in outlying suburban areas). Now Baby Boomers (of which I am them) are aging, and facing the ongoing (and ever more expensive) upkeep on these McMansions, both financially and physically. We cannot foist these white elephants on our children (if we have any) without burdening them with onerous property taxes, inheritance taxes, taxes up the wazoo, as well as the upkeep or upgrade expenses. This, in an economy that makes selling houses for profit almost impossible.

I think we are seeing a return to renting, and for a decade or more, that’s probably not a bad thing.

Home ownership makes sense for some people but not for everyone. For example, if you’re only expecting to live in an area for a limited time (say less than 5 years), it might make more sense to rent. That way, you’re aren’t tied down with a house when it’s time to leave. If you’re at all uncertain about your job over the next few years, renting beats ownership because it’d be easier to relocate to seek employment elsewhere.

There are some bad reasons to buy a house. We were told that houses always go up in value (except when they don’t) but that just isn’t true. Bubbles pop, major employers leave and other things happen that can cause house prices to decline, sometimes sharply.

Here are my suggestions for those considering buying a house:

1. Don’t look at the house as an investment. Except in super hot (pre-bubble) markets, when you add up all of the costs for your house verses the selling price with everything adjusted for inflation, you’re unlikely to make a true profit on a house in most of the country.

2. Don’t buy more house than you can really afford. Real estate brokers will try to get you to buy the most expensive house you qualify for because that increases their commission. Believe me, they aren’t working in your best interest.

3. Keep in mind that there are a lot of additional costs besides your mortgage payment such as furniture, repairs, taxes and fees. A new house will have additional costs such as window treatments and landscaping that can add many thousand dollars of expenses. Hint: don’t buy a home with a lot of fancy non-rectangular windows. This is a lesson learned the hard way. In our home, we had to add shutters to some large, non-rectangular windows to cut down on the sun in the summer. Those shutters had to be custom made and cost over $2000.

4. Look at your future house as a place to live, not a “lifestyle statement.” Do you really need granite countertops, stainless steel restaurant grade kitchen appliances and all sorts of luxuries, or do you need a place to live? There are a lot of home improvement networks and shows that try to convince people that good enough isn’t good enough, but then, look at who is advertising on those shows.

5. Pay off your mortgage as quickly as possible. With a typical 30 year fixed rate mortgage, almost all of your payment each month goes to interest. Adding as little as $100 a month can save you a full payment at the end of your mortgage. Doing that for a year can cut a full year off your mortgage. Paying even more can cut years off your payments, saving your tens of thousands of dollars over the life of your mortgage. Please believe me, living in a home that’s paid for is wonderful. Living 100% debt free is very liberating. I just lost my job but I’m not worried very much. Between our savings and the fact that our monthly bills are very low, I could practically retire now if I wanted to.

Plus, even if a person has a rock-solid income, what one can actually afford is really much less than either the banks or the realtors will push for. Unless you never want to go on vacation or send your kid to college, keeping the mortgage under 25% of one’s income is absolutely essential. We learned this the hard way with a second home that we could barely afford to visit. Since we sold it (broke even, gratefully) we are happy campers- well, we camp when we want and the rest of the time get to stay at the Marriott.

Also, a fifteen-year mortgage is nice, and a 20% downpayment to avoid the evil mortgage insurance.

By following all of these tactics, we have done well with our primary residence and it’s paid off now. But yes, unless you make megabucks the days of installing granite countertops and waterfall showers are over. The problem is, people still want them in the homes they buy right now- they just won’t pay for it. I’m ever so glad we aren’t looking to sell right now.